On 2 January 2014, the Security Interests (Jersey) Law 2012 came into force in respect of Jersey law security over intangible movable property (e.g. shares/securities, bank accounts and custody assets). The new law replaces the Security Interests (Jersey) Law 1983 (which was in force for the last three decades) and introduces a number of important changes which modernise Jersey's security regime.
The new law will be particularly relevant for banking and finance transactions (and share transfer property transactions) where there is Jersey collateral to be secured. This article summarises the main changes under the new law (particularly advantages for lenders) and the transitional provisions which apply to old law security.
- Creation vs perfection - The old law only had the concept of creation (as opposed to perfection) of security. This was generally done by the secured party having possession of the certificates of title (e.g. share certificates) or by the grantor assigning title to the collateral to the secured party (together with giving of written notice), in each case, pursuant to a Jersey security interest agreement (SIA).
Under the new law, security is still created under an SIA, but there is also the new concept of perfection. It is only when security has been perfected under the new law that it becomes enforceable against third parties (e.g. creditors and insolvency officials). Security can be perfected under the new law by control and/or by registration. However, security perfected by control will have priority over security perfected by registration.
- Control vs registration - Under the new law, security over certain types of specific collateral (shares/securities, bank accounts and securities accounts) can be perfected by control. The new law has a statutory definition of "control" which avoids some of the uncertainty under English law as to the level of control required to have first ranking security. For example, a secured party can take control over shares by taking possession of the share certificates, and can take control over bank/securities accounts by written agreement with the grantor and the relevant account bank or custodian (although the new law provides for different control options). The new law helpfully provides that security will generally not be prejudiced by the grantor having a right to deal with the collateral (e.g. by giving account instructions to the relevant account bank or custodian).
Security over any type of collateral can be perfected by registration under the new law. For example, this includes security over (a) all present and future intangible movable property, (b) contract rights/book debts, or (c) specific collateral which has also been perfected by control (as explained above). Security which is not perfected by control must be perfected by registration.
- Jersey Security Interests Register (SIR) - Under the new law, registration involves the filing of financing statements (or financing change statements) at the Jersey Security Interests Register (SIR). This is a new concept, as previously Jersey did not have a public register for security over intangible movable property, and Jersey is the first major offshore financial centre to introduce such a register. The SIR is an automated register (maintained by the Jersey registrar of companies) for which all the searches and registrations are done online. The SIR website and guidance notes can be accessed at https://sir.jerseyfsc.org.
- Enforcement - The old law provided that, where the event of default was capable of remedy, the security could not be enforced until the secured party had given the grantor 14 days' written notice of default. This was not popular with lenders under the old law, particularly for security over custody assets/other collateral which could materially decline in value if not sold quickly.
Under the new law, it is possible for the grantor and the secured party to contract out of the 14 day notice period before enforcement, and we expect that this will be market standard in new law SIAs (although the secured party will still need to give the grantor written notice of default before enforcing). The new law also provides for wider enforcement remedies for the secured party, such as appropriation (in addition to sale) and taking other ancillary actions.
- Jersey Security Interest Agreements (SIAs) - The Jersey security interest agreements (SIAs) under the new law should look similar to those under the old law, except they will reflect the control, registration and enforcement provisions explained above and may potentially cover a wider range of assets.
Market practice under the old law was for each SIA to create security over one type of collateral (e.g. shares, bank accounts or custody assets). A similar market practice will probably continue under the new law, except it is also possible under the new law to have a Jersey general security agreement creating security over all present and future intangible movable property (similar to an English law debenture). A general security agreement must be perfected by registration and will secure all assets from time to time such as securities, accounts and other intangible movable property.
The transitional provisions under the new law provide that security created under the old law will continue to be governed by the old law, unless the SIA is amended to add new collateral not contemplated under the original SIA. This means that, for the vast majority of historical transactions, there will be no need to amend the SIAs entered into under the old law, enter into new law SIAs, or register the security under the new law.
However, any Jersey law security over intangible movable property created after the new law came into force (2 January 2014) will be governed by the new law. Therefore it should be documented under a new law SIA and potentially registered at the SIR (depending on the type of collateral and the lender's registration policy).
Overall, the new law has a number of advantages over the old law, particularly in relation to registration and enforcement of security. The new law has been in development for a number of years and, so far, there seems to have been a smooth transition to the new regime and registration of security.
It is proposed to extend the scope of the new law in future to cover security over tangible movable property (e.g. inventory, equipment and consumer goods), which should open up new opportunities for lending against Jersey collateral. In the meantime, Jersey's security legislation has been modernised to reflect legal concepts from other jurisdictions such as the United Kingdom, New Zealand, Australia and Canada. It will be interesting to see how market practice develops under the new law and if other offshore financial centres follow suit with similar legislation.